Shareholder Agreements Can Limit Wrongful Dismissal Damages

Written by: Matthew K. LeBlanc

What happens when a company terminates someone who is both an employee and a shareholder?

In Kirke v Spartan Controls Ltd, 2025 ABCA 40 (“Spartan Controls”), the Alberta Court of Appeal reiterated the distinction between a person’s employment rights and their shareholder rights, and held that the payments owed upon termination can be reduced by the terms of a Shareholder Agreement – as long as their rights as a shareholder are not determined by their status as an employee.

1. What are employee stock options?

Stock options are an alternate form of compensation that companies can offer their employees.

Employee stock options provide employees with the right to acquire shares of their employer corporation at a designated price after a certain period of time. They are an alternative compensation method (over and above the wages and benefits found in a typical compensation package) that are used by businesses to encourage growth and to attract, retain and engage prospective hires and current employees.

Employee stock options can take various forms, including employee profit sharing plans (EPSPs), employee stock purchase plans (ESPPs), employee stock option plans (ESOPs), or other arrangements, each with their own Income Tax Act considerations.

Stock options are common for C-Suite, or executive-level managerial, employees. They are also frequently used by start-ups—who may have cashflow and profit restraints that limit their ability to offer fully competitive salaries—to offset their compensation package by offering enhanced employee stock options to attract and retain talent.

When an employee buys company shares, they assume two sets of rights: (a) their rights as an employee, concerning the terms of their employment and the termination thereof, and (b) their rights as a shareholder, concerning their retention of shares and receiving of dividends.

2. What is owed to an employee upon termination?

When an employee is terminated without cause, they are entitled to two ‘buckets’ of compensation: their statutory entitlements and their ‘additional’ entitlements.

Statutory entitlements for provincially-regulated employees are dictated by: New Brunswick’s Employment Standards Act,[1] Nova Scotia’s Labour Standards Code,[2] Newfoundland and Labrador’s Labour Standards Act,[3] or Prince Edward Island’s Employment Standards Act.[4]

An employee’s ‘additional’ entitlements, however, are dictated by either of the following:

 i. Contractual entitlement (liquidated damages): If the employee has a written employment contract containing a valid and enforceable termination clause, they are entitled to the amounts as set out and agreed to in the termination clause of their Employment Agreement.

or

ii. Common law entitlement (compensatory damages): If the employee does not have a written employment contract, or if their written employment contract does not contain a valid and enforceable termination clause, they are entitled to the compensation they would have received during their reasonable notice period.

If an employee has common law entitlement, this means that they are entitled to monetary damages to compensate them for their losses incurred during their reasonable notice period. This can include wages, benefits, bonuses, pension contributions, allowances, and so on. These compensatory damages are subject to mitigation, unlike liquidated damages.

3. What is owed to a terminated employee who is also a shareholder?

On February 7, 2025, the Alberta Court of Appeal in Spartan Controls addressed the issue of what reasonable notice damages are owed to a person who is terminated from their employment without cause, but who is also a shareholder.

In that case, a managerial employee worked for the company for 24.5 years. While employed, he was issued a total of 73,600 shares in his employer’s parent company, pursuant to an optional Profit-Sharing Program. This entitled him to regular profit-sharing payments commensurate with his shares. Under the terms of the Shareholder Agreement for this Profit-Sharing Program, the company could buy back any employee-owned shares at any time upon giving ninety (90) days’ notice.

The employee was terminated without cause. In his termination letter, the company wrote that it was providing him, in his capacity as a shareholder, with 90 days’ notice that it was buying back all of his shares. He sued for wrongful dismissal.

The trial judge held that the employee was entitled to a reasonable notice period of twenty (20) months. All parties agreed that this meant he was entitled to his base pay, his benefits and his quarterly bonus payments for the 20 months following his termination. However, they did not agree on whether he was entitled to profit-sharing payments for a period of 20 months (pursuant to his employment rights) or only 90 days (pursuant to his shareholder rights).

The Alberta Court of Appeal held that he was entitled to profit-sharing payments for only 90 days. The Court held that the critical question for determining a person’s entitlement to retain shares and receive dividends during their entire reasonable notice period is whether their rights as a shareholder are determined by their status as an employee.[5]

In this case, the employee’s rights to retain shares and receive profit-sharing payments were governed by the terms of the Shareholder Agreement – which were not dependent on his active employment. In other words, his rights to retain shares and receive profit-sharing payments were not linked in any way to his right to work. The company could buy back any shareholder’s shares at any time upon 90 days’ notice – regardless of whether the shareholder was actively employed or not.

As a result, the Court of Appeal held that the employee’s right to profit-sharing payments was a shareholder right—not an employment right—that expired after the company’s provision of 90 days’ notice. His shareholder right to profit-sharing payments could not be linked to his employment right to 20 months’ reasonable notice of termination.

The employee also sought the oppression remedy in his capacity as a shareholder. The Court of Appeal dismissed this argument because he could not establish that, as a shareholder, there was a reasonable expectation that the company would not buy back his shares if he was terminated from his employment. Put differently, there was no evidence that shareholders who were also employees were entitled to more beneficial profit-sharing rules under the Shareholder Agreement than shareholders who were not employees. The Shareholder Agreement’s buyback clause applied to all shareholders equally, irrespective of their status, or non-status, as employees.

4. Takeaways

Unless otherwise stipulated in an Employment Agreement and/or Shareholder Agreement, a person’s employment rights are distinct from their shareholder rights.

It is always recommended that employees sign a written Employment Agreement that contains a valid and enforceable termination clause. This streamlines wrongful dismissal lawsuits because the employee’s claim to ‘additional’ entitlement will be grounded in liquidated damages (determined by the termination clause in the Employment Agreement) and not by compensatory damages (determined by assessing the losses incurred during a reasonable notice period).

Companies should also review their Shareholder Agreements to assess the existence and scope of any buyback provisions for employee-owned shares, as these clauses can limit the damages owed in wrongful dismissal lawsuits.

[1] See New Brunswick Employment Standards Act, SNB 1982, c E-7.2.

[2] See Nova Scotia Labour Standards Code, RSNS 1989, c 246.

[3] See Newfoundland and Labrador Labour Standards Act, RSNL 1990, c L-2.

[4] See Prince Edward Island Employment Standards Act, RSPEI 1988, c E-6..

[5] See also Mikelsteins v Morrison Hershfield Limited, 2019 ONCA 515.